Yet as a company, Waste Management (ticker: WM) presents a sloppier story. Revenue, earnings, margins, and cash flow have been stagnant for years. It is undergoing the latest in a succession of cost-cutting programs to rationalize an organization built by buying garbage-collection and landfill operations over decades. Pricing power is scant, capital spending to maintain its vehicles and facilities is a ceaseless treadmill, and rates fetched on the recycled cardboard and aluminum it sells have ebbed.

Spending on items like maintenance of Waste Management's truck fleet has to continue even if revenue and cash flow have been stagnant for years.
Daniel Acker/Bloomberg News

While it's perfectly reasonable for a mature, no-growth business to redirect what cash it generates to shareholders, the notion of the investor-pleasing, dividend-boosting blue-chip stock of a structurally challenged company can't persist forever.

"We have had a stated goal of being in the top quartile of dividend yield for Fortune 500 companies," explains a Waste Management spokeswoman.

The company's dividend has grown dramatically in recent years and now consumes a majority of its net income and free cash flow. While the payout at current levels appears secure, the company won't be able to raise distribution levels very much from here. And with its shares already valued at a premium to the broad market, based on current and expected earnings, it's hard to see the yield falling significantly below today's 4% level through further stock appreciation. The spokeswoman notes the company already has started to slow its rate of dividend increases. After two years of 10-cent hikes, the payout went up 6 cents a share in 2012, from 2011.

With smaller increases, the stock, now at $35.68, is likely dead money at best, and is at risk of falling 10% to 15% toward $30 if the company's habit of missing profit expectations continues. That doesn't reflect an eventual rise in market interest rates that would take the shine off yield-centric stocks.

Waste Management/WM

Market Value (bil)

$16.5

Recent Price

$35.68

52-Week High

$36.35

52-Week Low

$28.77

2011 EPS

$2.12

EPS 2012E

$2.15

P/E 2012E

16.6

E=Estimate

Source: Thomson Reuters

Waste Management was a great growth stock in the late 1990s, rising 450% between 1994 and 1999, to a peak above $55, as it delivered rapid profit growth by rolling up the fragmented waste-services industry. The company was then beset by accounting inquiries, management turmoil, and shareholder lawsuits, before settling into a stagnant middle age in recent years. Garbage volume has been flat to down for years, thanks to conservation, recycling, and slow industrial growth, and is just now firming from its downturn during the recession.

CONSIDER THAT FOR Waste Management in 2006, revenue was $13.4 billion, cash generated from operations was $2.5 billion and, after capital spending of $1.3 billion, free cash flow amounted to $1.2 billion. In 2011, it was as if time had stood still: Revenue totaled $13.4 billion, cash from operations slightly below $2.5 billion and, after $1.3 billion in capital spending, free cash flow was just over $1.1 billion.

So, there was no growth and, indeed, very little variation in yearly results within that span, even though the U.S. economy was about 15% larger in 2011 and the company, on a net basis, had spent nearly $800 million on acquisitions. For 2012, forecasts are for more of the same: revenue of $13.8 billion and, according to company guidance, $1.1 billion to $1.2 billion in free cash flow.

What has changed is how much of that cash now goes to shareholders. About 74 million net shares have been retired through buybacks since 2006, helping per-share earnings to rise modestly. Yet it is the sizable dividend increases that have held investors' attention and kept the shares afloat. At a per-share rate of 88 cents in 2006, total dividends were $476 million, or 40% of free cash flow. At the current rate of $1.42 a share, or $658 million in total, dividends this year will consume more than 57% of projected free cash flow, and about two-thirds of expected earnings of $2.14 a share.

The Bottom Line

The shares are vulnerable to a 10% to 15% fall from recent levels. More and more of the garbage collector's flat free cash flow is going to maintain an attractive dividend.

The math dictates that dividend growth will be slower and slighter, and buyback activity reduced, compared with recent years. That eventually could draw more attention to the company's unimpressive operating performance.

Waste Management has missed adjusted per-share earnings forecasts in five of the past eight quarters. Price increases, crucial given flat waste volumes, have been hard to come by, and will likely fall short of 2% again this year. Municipalities, a major customer, face abiding financial pressures. Prices for the recycled material the company sells have been soft and will remain a headwind this year.

Credit Suisse analyst Hamzah Mazari notes that the company will need to sell noncore assets, such as some energy-production holdings, to meet its guidance for free-cash-flow generation this year.

Waste Management still trades at 16.6 times expected 2012 earnings, a 20% premium to the broad market–only, it seems, because of the dividend.

Collecting a safe-seeming 4% a year without caring too much where the stock eventually trades is fine for some investors. But for others, it's worth noting that a handful of corporate insiders have sold 180,000 shares in the past six months near current prices, rather than keeping them for that nice dividend.